mardi 20 septembre 2016

Stericycle exploring new depths

There's not a lot to tell about Jason Donville these times, so, I keep going with François Rochon and his picks.

When you first look at Rochon's selection (Giverny Capital) via Whale Wisdom, you ask yourself: "How does this guy works?" because you find a lot of average ROE and average growth stocks. Plus,  almost all these stocks have a high PE ratio. The only thing we can think is that these businesses have a fucking amazing moat that we didn't know about.

Among Giverny Capital's list, you'll find Mohawk, LKQ, Buffalo Wild Wings and Stericycle. All average ROE, all average growth and high PE.

Let's take a look at Stericycle.

Some people say it's a monopoly. That business collects and destroys medical waste.

I've never understood how a business in that field could be a monopoly.

What do you need to collect needles and other medical waste? Some protecting gloves. And probably some container to put waste in it. And then you put that shit in an incinerator and that's it. OK, they probably manipulate some oncology stuff, full of uranium, plutonium or any other radioactive stuff that they'll use to make cars fly in the future. That's probably the tricky part but I'm sure that they can bury that shit under a school on a weekend, when everybody looks elsewhere.

The market has always seen Stericycle as some kind of super mega giga invulnerable business. The stock went from about 29$ in august 2005 to almost 150$ in august 2015 (5 baggers). Since then, the stock lost half it's value. The stock is now selling for about 77-78$.

The average PE ratio of the last 5 years was 34. The actual PE ratio is 29. That's very high for a business with an average growth rate (the growth has been good for some years in the past but it wasn't consistent). Note that EPS are now almost the same in 2016 as they were in 2011.

The ROE has been between 18 and 23 since 2006 but is now much lower than that (actual ROE: 10).

The debt is high (about 15 times earnings), they recently had issues with accounting and their latest acquisition (Shred-It) raises some questions. How come buying that kind of business? I don't know. Please, ask someone else.

Some could argue that, with a forward PE of about 15, this stock looks pretty cheap on an historical basis.

That's true. But there's a lot of other stocks out there with a forward PE of 15, with better growth, better ROE and no accounting issues. My latest experience with accounting issues was unforgettable: Oh, sweet Valeant.

So, forget the free fall of Stericycle as an indicator to buy it. That's a mistake we all do. We should compare stocks with other stocks and not with themselves. 

9 commentaires:

  1. The name that goes best with the title EXPLORING NEW DEPTHS is...

    Concordia Healthcare (now under $7).

    As for Mr Rochon. One of his valuable lessons is to avoid cyclical companies because it is hard to predict their earnings. It's a trap I have fallen into more than once. For example, the automotive industry is cyclical. Of course, Mr Rochon loves the biggest retailer of used vehicles in America (CarMax). He realizes growth may slow in the short term, but considers CarMax a great long term play. CarMax revolutionized the used car business (low prices, no haggling or negotiating, etc)

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  2. Shares of CarMax Inc. KMX, -5.49% tumbled 5.5% in premarket trade Wednesday, after the used car seller reported disappointing fiscal second-quarter results. Net earnings for the quarter ended Aug. 31 were $162.4 million, or 84 cents a share, compared with $172.2 million, or 82 cents a share, in the same period a year ago.

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    Réponses
    1. To me, everything looks better with Lithia Motors.

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    2. LAD is a much better investment. Like you said, everything looks better than carmax when looking at key statistics. There was a time when Lithia Motors was a darling of the momentum investors and a top pick of INVESTORS BUSINESS DAILY newspaper. They wanted it at 30x earnings but they are not sure now that it is a bargain.

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  3. Hey Penetrator fuck that feels weird to write . Great Blog but I think that you should consider the Book Value per share growth rate more. It isn't a well followed value but if current share value is bv/s * ROE * PE. then the future value of a company would be BV/s * (1+annual bv/s growth rate) ^years * future ROE * future PE. You have to estimate the growth rate, future PE, future ROE. Discount that back to today with your desired rate of return and you get intrinsic value. Buy it for less than that and you get your margin of safety. Fuck ya! Sorry just trying to fit in. You need consistency and a moat to use the method but it's Buffet or as close as I can figure. What do you think?

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    1. I very rarely look at book value. I don't invest that way. The only stock I'd check thinking about book value would probably be Berkshire.

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    2. It's funny that you don't think about book value howewer you always talk about ROE that equals to Earnings/Book Value. So, if BV isn't that important, why do you always use ROE to value a company?

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  4. Hey Penetrator fuck that feels weird to write . Great Blog but I think that you should consider the Book Value per share growth rate more. It isn't a well followed value but if current share value is bv/s * ROE * PE. then the future value of a company would be BV/s * (1+annual bv/s growth rate) ^years * future ROE * future PE. You have to estimate the growth rate, future PE, future ROE. Discount that back to today with your desired rate of return and you get intrinsic value. Buy it for less than that and you get your margin of safety. Fuck ya! Sorry just trying to fit in. You need consistency and a moat to use the method but it's Buffet or as close as I can figure. What do you think?

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  5. Agreed Unknown. ROE is the best measure of a company but you have to consider the overall picture.

    A company can have a great ROE but pay out all of its earnings in dividends and it won't grow. The only return you would get would be the dividend yield (except PE multiple expansion but that is temporary). For example take a look at Vitreous Glass.

    Don't look at P/BV necessarily but BV/S growth. The greats companies with a sustainable advantage and skillful management can reinvest their retained earnings and maintain a high ROE year after year. The company has to have enough organic growth opportunities, acquisition targets or do enough share buybacks to maintain the steady BV/Share growth and a high ROE.

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